Over the last couple of days we have seen market gurus and forecasters shoving each other out of the way in an attempt to shine under the media spotlight for the gloomiest market forecast award.
This has probably got you thinking and debating whether you should be pulling your money out of the stock market and waiting for things to ‘get better’ (although I don’t know what ‘get better’ means).
You may or may not know this, but the US stock market, as represented by the S&P 500, has declined 10% or more on about 28 occasions from 1926 to 2015. That’s about 1 every 3 years (yes, stock market corrections are normal folks).
Trying to avoid any further losses by attempting to time the market can be enticing. I’ll get out now, and get back in at a lower price. Simple…right? Sure. Not only do you need to time your exit, you also need to time your re-entry. This is a two-step process. In an attempt to minimise short-term losses, investors run the risk of failing to participate in even larger long-term gains.
The share-market is (or should be) forward looking, it moves by not only reflecting new available information, but also expectations for the future – both positive and negative. For example, for some time the US Federal Reserve was expected to raise interest rates in the US. The market priced this information in well and truly before the rate hike actually happened.
This is also the case with past market recoveries. They happen before the economy officially grows out of recession (I think this is what you may mean when you say you will wait for things to ‘get better’?).
Thanks to Franklin Templeton Investments, the charts below show the S&P 500 Index’s movements shortly before, during and right after each of the seven US recessions over the past 50 years through 2014. During this period, recessions lasted an average of 13 months, and stocks hit bottom an average of 4 months before the recession ended.
Don’t be fooled by the ‘gurus’. The reality is that no one really knows whether the stock-market is heading for a correction or a bear market, how deep it falls and how long it lasts. What we do know however, is those investors, who accept dramatic price fluctuations in the short-term, may have a clear advantage over those who are easily frightened and react to the day-to-day noise of the stock market. History tells us that those investors are more likely to achieve a much better financial outcome over the long-term.
Remember, invest in line with your personal goals and aspirations, don’t take unnecessary risk, diversify, remain disciplined, and most importantly, have a plan.
Please note that all information provided within this article is of a general nature and does not take into account your current financial situation, needs or objectives. Before acting on any of the information you should consider its appropriateness, having regard to your own objectives, financial situation and needs. Baharian Wealth Management recommends investors obtain financial advice specific to their situation and consider the Product Disclosure Statement prior to making any financial investment or insurance decision.